3 Roads to Retirement

Do you want to end up on the road less traveled?

Two roads diverged in a wood, and I -- I took the one less traveled by, and that has made all the difference. -- Robert Frost, "The Road Not Taken"

When planning for your retirement, it's easy to start out on the straight and narrow and then find yourself faced with a divergence. Unlike Frost's famous work, however, the retirement superhighway can split into many more roads than just two. Should you throw all your money into a savings account? Open up an IRA? Will Social Security be your savior? Are you waiting until you buy a house, pay off your credit cards, and hammer out a new budget before you begin your retirement plan?

And then comes the crystal-ball portion of the planning process. Where do you want to be several decades from now? How do you want to live? And, based on your savings at this point, how can you afford to live?

You've got a lot of choices to make, to be sure, and each one will have a significant impact on your future earnings potential and lifestyle. But three main retirement options hover above all the day-to-day choices you make. Which road are you on?

Road No. 1: Retire broke.That is, retire without doing anything at all. And why would you? You've had a good run so far. Indeed, you shop in Nordstrom, Chico's, and Macy's stores week after week, buying the latest fashionable attire. Or you find yourself at the Toyota dealership, trading in car after car well before its prime so you can be part of the Next Big Trend. And you've got the credit line to make all of this happen.

Sure, you look good in your new togs sitting in your new Prius, but at what cost? How long can you continue to live above your means before you start feeling the effects?

You'll always have that cash, right? I mean, when you max out one credit card, you can just open another one. As long as you pay your minimums, you're golden.

Except for those times when you can't -- when you or your spouse falls ill, when your daughter needs emergency surgery, when a tree grows its roots straight through the plumbing leading into your home and you've got to pay thousands of dollars to make things better. Then it's time to dip into your 401(k) or IRA, promising to pay yourself back later. You've got plenty of time until retirement, so you figure it'll be easy to get back on track as soon as the crisis is over.

Unfortunately, the magic of compounding can't be regained in a short time. Even a decade isn't enough for many people to make back what they've withdrawn. And the more you crunch the numbers, the more apparent it is that your retirement will actually be a nonretirement. To pay off your debt, to fund your savings and investment vehicles adequately, you'll need to work for many, many more years.

You look good, though.

Road No. 2: Retire like the average American.According to the Employee Benefit Research Institute's (EBRI) 2005 Retirement Confidence Survey, if you're striving for average, you're not alone. The survey's results state that 52% of workers "believe they are behind schedule when it comes to planning and saving for retirement." It continues: "Most of those behind schedule say that high expenses, particularly everyday expenses (49%), child-rearing expenses (39%), and medical costs (35%), are a major factor in keeping them from saving."

As an "average American," you'll likely have very little knowledge of what it's actually going to cost to retire. About 60% of workers included in the EBRI survey say they haven't even tried to calculate their retirement expenses. And 10% of those who've tried to calculate their savings needs have done so by ... guessing. By the time they figure out how much extra money they'll need to live sufficiently in retirement, the moment has passed to accrue it with ease. The time to make such financial decisions isn't five years or even a decade before retirement -- it's 25 years (or more) beforehand.

So, as an average American, you're spending too much and saving too little, and you're unaware of the asset accumulation you're going to need in retirement. Is it just me, or is "average" looking less and less palatial?

Road No. 3: Retire like a pro.One way to achieve a successful, lucrative retirement is by using the asset-allocation suggestions Robert Brokamp and his team of writers talk about so often in their Motley Fool Rule Your Retirement newsletter. In a recent issue, for example, contributor Doug Short discusses the benefits of various allocation percentages as a combatant to inflation -- the bane of many retirees' savings.

And indeed, by balancing your investments between bond funds such as Vanguard High-Yield Corporate (VWEHX), which holds debt in such companies as Qwest(NYSE:Q) and Xerox(NYSE:XRX), and stalwart blue-chip equities such as Pepsi(NYSE:PEP) and Target(NYSE:TGT), you'll have both the advantage of equity growth and a defense against too many bumps along the way. Moreover, if you can't devote enough time to following individual investments, large-cap funds such as Yacktman (YACKX), run by longtime manager Donald A. Yacktman, can be a solid alternative. With holdings in companies such as Clorox(NYSE:CLX), Tyco(NYSE:TYC), and Lancaster Colony(NASDAQ:LANC), the Yacktman fund casts a wide net for good values in the large-cap arena. Not a bad proposition for would-be retirees on the go.

Retiring in a way that puts you on Easy Street comes down to sound planning. You planned to defer some of your immediate "fun" in favor of the future. You planned your investments decades ago, and they paid off handsomely, capital gains taxes or no. You paid yourself first by setting money aside in higher-yielding savings vehicles. You allocated your assets wisely, factoring in (and hopefully paying off) any outstanding debts and taking inflation into consideration. And surely you socked away as much as possible in your 401(k) or IRA. Well, it all paid off, my friend. Look at you now, confidently saying goodbye to the boss and hello to whatever comes next!